
[Federal Register Volume 79, Number 186 (Thursday, September 25, 2014)]
[Notices]
[Pages 57639-57640]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-22784]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73147; File No. SR-ISE-2014-09]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving Proposed Rule Change Related to Market Maker Risk 
Parameters

September 19, 2014.

I. Introduction

    On March 10, 2014, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend ISE Rules 722 and 804 to 
mitigate market maker risk by adopting an Exchange-provided risk 
management functionality. The proposed rule change was published for 
comment in the Federal Register on March 26, 2014.\3\ The Commission 
received no comments on the proposal. On May 7, 2014, pursuant to 
Section 19(b)(2) of the Act,\4\ the Commission designated a longer 
period within which to either approve the proposed rule change, 
disapprove the proposed rule changes, or institute proceedings to 
determine whether to disapprove the proposed rule change.\5\ On June 
24, 2014, the Commission instituted proceedings to determine whether to 
approve or disapprove the proposed rule change.\6\ In response to the 
Order Instituting Proceedings, the Commission received five comment 
letters on the proposal.\7\ This order approves the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 71759 (March 20, 
2014), 79 FR 16850 (March 26, 2014) (SR-ISE-2014-09) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 72117, 79 FR 27360 
(May 13, 2014). The Commission determined that it was appropriate to 
designate a longer period within which to take action on the 
proposed rule change so that it would have sufficient time to 
consider the proposed rule change. Accordingly, the Commission 
designated June 24, 2014, as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
    \6\ See Securities Exchange Act Release No. 72455, 79 FR 36849 
(Jun. 30, 2014) (``Order Instituting Proceedings''). In the Order 
Instituting Proceedings, the Commission noted, among other things, 
that questions remains as to whether the Exchange's proposal is 
consistent with the requirements of Section 6(b)(5) of the Act, 
which requires, among other things, that the rules of a national 
securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to perfect the mechanism of a free and open 
market and a national market system, and not be designed to permit 
unfair discrimination between customers, issuers, brokers, or 
dealers. Additionally, the Commission questioned whether the 
proposal is consistent with Section 6(b)(8) of the Act, which 
requires that the rules of a national securities exchange do not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
    \7\ See Letters to the Commission from Andrew Killion, Chief 
Executive Officer, Akuna Securities LLC, dated July 24, 2014 
(``Akuna Letter''); Brent Hippert, President/CCO, Hardcastle Trading 
USA LLC, dated July 28, 2014 (``Hardcastle Letter''); John Kinahan, 
Chief Executive Officer, Group One Trading, L.P., dated July 29, 
2014 (``Group One Letter''); Sebastiaan Koeling, Chief Executive 
Officer, Optiver US LLC, dated July 29, 2014 (``Optiver Letter''); 
and Andrew Stevens, General Counsel, IMC Chicago, LLC d/b/a IMC 
Financial Markets, dated August 18, 2014 (``IMC Letter'').
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II. Description of the Proposal

    The Exchange proposes to amend ISE Rule 722 and ISE Rule 804 to 
enhance its risk management offering for market maker quotes.\8\
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    \8\ For a more complete description of the proposal, see Notice, 
supra note 3.
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    Currently, there are four parameters that can be set by market 
makers on a class-by-class basis. These parameters are available for 
market maker quotes in single options series and in complex instruments 
on the complex order book. Market makers establish a time frame during 
which the system calculates: (1) The number of contracts executed by 
the market maker in an options class; (2) the percentage of the total 
size of the market maker's quotes in the class that has been executed; 
(3) the absolute value of the net between contracts bought and sold in 
an options class, and (4) the absolute value of the net between (a) 
calls purchased plus puts sold, and (b) calls sold plus puts purchased. 
Once the limits for each of the four parameters are exceeded within the 
prescribed time frame, the market maker's quotes in all series of that 
class are automatically removed or curtailed. Additionally, ISE's rules 
provide that if a specified number of curtailment events are exceeded 
within the prescribed time period, the market maker quotes in all 
classes will be automatically removed from ISE's trading system.\9\ The 
Exchange now proposes to implement functionality to allow market maker 
quotes to be removed from the trading system if a specified number of 
curtailment events occur across both ISE and ISE Gemini, LLC (``ISE 
Gemini'').
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    \9\ See Securities Exchange Act Release Nos. 70132 (August 7, 
2013), 78 FR 49311 (August 13, 2013) (SR-ISE-2013-38) and 71446 
(January 30, 2014), 79 FR 6951 (February 5, 2014) (SR-ISE-2014-04).
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    To the extent that a market maker utilizes the offered 
functionality, ISE and ISE Gemini's trading systems will count the 
number of times a market maker's pre-set curtailment events occur on 
each exchange and aggregate them. Once a market maker's specified 
number of curtailment events across both markets is reached, the 
trading systems will remove the market maker's quotes in all classes on 
both ISE and ISE Gemini. The Exchange will then reject any quotes sent 
by the market maker after the parameters across both exchanges have 
been triggered until the market maker notifies the market operations 
staff of the Exchange that it is ready to come out of its curtailment. 
Once notified by the market maker, the Exchange will reactivate the 
market maker's quotes on the Exchange.
    The Exchange believes that the proposal will enhance the Exchange's 
current risk management offering by allowing market makers to manage 
their

[[Page 57640]]

risk across ISE and ISE Gemini. The Exchange also provides that the 
proposal will protect market makers from inadvertent exposure to 
excessive risk and thereby allow them to quote aggressively and provide 
more liquidity with greater size to both markets. The Exchange further 
represents that its proposal will operate consistently with the firm 
quote obligations of a broker-dealer pursuant to Rule 602 of Regulation 
NMS and that the functionality is not mandatory.

III. Summary of Comment Letters

    As noted above, the Commission received five comment letters in 
response to the Order Instituting Proceedings.\10\ All of the 
commenters support the proposal. Three of the five commenters are 
registered options market makers on ISE,\11\ while the other two are 
registered options market makers on both ISE and ISE Gemini.\12\
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    \10\ See supra note 7.
    \11\ See Akuna Letter; Hardcastle Letter; and Group One Letter, 
supra note 7.
    \12\ See Optiver Letter and IMC Letter, supra note 7.
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    The commenters note that, while the current risk protections on the 
Exchange help manage risk, systems and other issues that trigger such 
risk parameters are normally not confined to a member firm's activity 
on a single exchange.\13\ Accordingly, the commenters believe that the 
Exchange's proposal to aggregate curtailment events across both ISE and 
ISE Gemini would allow market makers to more effectively manage 
risk.\14\ The commenters state that the proposed rule change would 
allow market makers to continue to actively provide liquidity, while 
facilitating effective management of the risks associated with quoting 
a large number of option series across multiple exchanges.\15\ Further, 
the commenters believe that allowing market makers to better manage 
their risk would benefit the broader market, as it would reduce 
disruptive trading events.\16\
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    \13\ See Akuna Letter; Group One Letter, Hardcastle Letter; IMC 
Letter; and Optiver Letter, supra note 7.
    \14\ See, e.g., Akuna Letter at 2; Hardcastle Letter at 2; and 
Optiver Letter, supra note 7.
    \15\ See Optiver Letter and IMC Letter, supra note 7.
    \16\ See Akuna Letter at 2; Hardcastle Letter at 2; and Optiver 
Letter, supra note 7.
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    Two commenters who are registered market makers on ISE but not on 
ISE Gemini also believe that the proposal is not unfairly 
discriminatory in violation of Section 6(b)(5) of the Act.\17\ These 
two commenters note that the proposal is optional to market makers and 
is not unfairly discriminatory to firms who simply have no need for the 
proposal's additional protections by virtue of only trading on either 
ISE or ISE Gemini.\18\
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    \17\ See Akuna Letter at 2 and Hardcastle Letter at 2, supra 
note 7.
    \18\ Id. One commenter also states that it does not believe the 
proposal places any undue burden on competition between options 
exchanges. See Group One Letter at 2, supra note 7.
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IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\19\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\20\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \19\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal could assist ISE market 
makers manage and reduce inadvertent exposure to excessive risk across 
both ISE and ISE Gemini. The Commission notes that the proposed 
functionality is not mandatory and must operate consistent with the 
firm quote obligations of Rule 602 of Regulation NMS. The Commission 
also notes that all five commenters expressed support for the proposal.
    For the foregoing reasons, the Commission believes that the 
proposed rule change is consistent with the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\21\ that the proposed rule change (SR-ISE-2014-09) be, and it hereby 
is, approved.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-22784 Filed 9-24-14; 8:45 am]
BILLING CODE 8011-01-P


